Charitable Giving

No discussion of estate planning would be complete without addressing method of making gifts to charitable organizations either during one’s lifetime or at the time of one’s death.  Of course, the easiest method to make such a gift is to write a check now, or to make a bequest of a specific dollar amount or percentage in the donor’s will or living trust to take effect at death.  But there are lots of reasons such an approach might not be best for a particular donor.  This section sets forth some other options for making gifts to charity.

Just as charitable gifts may result in an income tax deduction, charitable gifts will generally not be included in the donor’s taxable estate if that estate is substantial enough to be subject to a state or federal estate tax.

Gifts In-Kind 

Gifts in-kind are gifts of specific assets.  They can be tangible assets (real estate, cars or jewelry) or intangible assets (stocks, bonds, insurance policies).  Usually, in-kind gifts of appreciated assets let the giver avoid having to recognize gain for income tax purposes while claiming a charitable income tax deduction equal to the full fair market value for the asset on the date the charitable gift is made.  In those cases when the gift comprises a large percentage of the giver’s annual income, and the whole amount cannot be deducted in the year the gift is made, it will usually be possible to claim the rest of that amount as a charitable tax deduction in the years that follow.

Since qualified charitable organizations do not have to pay income tax on the giver’s gain when it sells the asset later, the charity receives a larger benefit from the asset than if the giver had sold the asset themselves, and then given the after-tax proceeds to the charity.  But, not everyone can afford to give valuable assets.  In some cases, the owner needs to be able to receive the benefit of that asset now or in the future.  There are some ways to make gifts that allow the giver to retain the benefit of the asset while receiving an income tax deduction for the value of the gift right now:

Retained Life Estates

There are some donors who decide they want their home to go to a particular charity after they pass away.  Rather than leave the house to that charity in their wills, the donors can make the gift right now, but reserve the ownership rights of that property during their lifetime.  By making that gift in this way, the donor receives an income tax charitable deduction which can be very substantial.

Charitable Remainder Trusts

A donor who wants to receive a stream of income from an appreciated asset either for his lifetime, or for a set number of years, can establish one of these trusts and receive a charitable income tax deduction that depends on the amount of the asset’s value that is likely to go to the charity at the end of that period.  These trusts can also be used to avoid capital gain when appreciated assets are sold, because no gain is recognized when the trust sells the asset.

Though the donor is likely to pay tax on that gain at a slower rate as he receives distributions from the trust, the trust may be able to generate more income because it can invest the entire gain from the asset’s sale, not just the net amount after the owner has paid income taxes on the gain.

Gift Annuities

Unlike charitable remainder trusts which may contain 20 or 30 pages of “legalese,” a gift annuity is a simple one or two-page contract between a charity and a donor.  In exchange for a gift, the charity agrees to pay the donor a set sum or percentage of that gift every year during the donor’s lifetime, or for a set period of years.  If the charity pays out less than it receives from the donor and earns on those gifts, it benefits from the arrangement.  Though it is simple, it depends more on the financial reliability of the charity and is regulated by the state of Washington, though this may not be the case in all states.  Charities may partner with charitable foundations to offer this sort of product.

 By delaying the date that payments start being made to the donor until the donor’s retirement, charitable remainder trusts and gift annuities can be effective retirement planning vehicles.

Charitable Lead Trusts  

These trusts are the “flip side” of charitable remainder trusts.  The donor places assets into trust which pay a fixed percentage or amount to a designated charity for a set period of years and then pays the balance left in the trust to the donor or the donor’s heirs after that period is over.  The donor receives a current income tax deduction, and may be able to reduce any gift and estate tax consequence of the property which ultimately goes to his heirs.